If Salesforce.com’s recent announcement that Merrill Lynch signed a 5,000-seat deal wasn’t enough to bolster the argument for hosted CRM in the enterprise, a report from Boston-based AMR Research Inc. should be.

Hosted CRM has gained a firm foothold in the market and, according to AMR, that goes for larger businesses as well as small. In a survey of roughly 200 companies across the services and manufacturing industries, AMR found that 40% are using hosted CRM applications. Not only that, but 49% of companies will use a hosted sales or e-commerce application within the next 12 months, including 47% of companies with 5,000 or more employees.

"The common notion is that [hosted CRM] is relegated to small companies," said Rob Bois, senior research analyst at AMR. "As you see with Salesforce announcing the Merrill Lynch deal, these vendors are moving upstream."

While the overall percentage of companies AMR found using hosted CRM may seem high, the research included only North American firms and any hosted deployment such as a small sales force automation (SFA) rollout to a salesforce or an e-commerce operation through a hosted provider. 

But how long these larger firms stay with the hosted model remains unknown. "Time will tell," Bois said. "How long Merrill Lynch stays on a hosted model is yet to be determined. As [hosted vendors] evolve, they’re locking their customers in. The integration and customization work indicates they’re there for the long term. You’re not going to do that and flip to on-premise in a couple years."

However, without the upfront investment in licenses and the ease of switching to the growing number of competitors in the market, hosted CRM companies need to be wary of customer defection.

In fact, a recent ROI report from Wellesley, Mass.-based Nucleus Research Inc. found that of the 29 customers of San Francisco-based Salesforce.com it studied, 11 were either planning or were open to a move to another solution.

"What it says is that customers are really continuing to look at what’s out there," said Rebecca Wetteman, vice president of research at Nucleus. "Initially hosted CRM was about low costs and flying under the radar. Much more recently, we’re seeing on-demand being flexible. High usability, more integration and analytics are compelling features, rather than it just about being cheaper."

While Salesforce.com customers may be willing to switch vendors, it doesn’t necessarily mean they’re switching delivery models. Bois said he hasn’t seen many examples of a company going from a hosted application to one on-premise.

Although hosted CRM offerings have been around for years, they have only recently started to gain widespread acceptance. Salesforce.com has been preaching the gospel of on-demand applications since the company was formed, and it has jumped out to an early lead with the largest customer base.

At its recent press and analyst event in New York, the company announced it had added 40,000 subscribers and 1,600 new customers in the first quarter of this year, giving it a total of 267,000 subscribers and 15,500 total customers. Despite the gains in enterprise customers with names like ADP, SunGard and Honeywell, in addition to Merrill Lynch & Co. Inc., that still works out to an average of 17 subscribers per customer. In its report, Nucleus couldn’t find any customers with more than 2,000 users and, of seven enterprise accounts, all had fewer than 1,000 users.

And the competition is growing more fierce. While Salesforce.com was able to boast about its Merrill Lynch win in what was a competitive bid with Siebel’s CRM OnDemand application, both Siebel and RightNow Technologies Inc. offer features that deliver more value, particularly on the contact center side, Wetteman said. Additionally, Boston-based Salesnet Inc., a hosted provider that focuses squarely on SFA and the guided selling approach, has announced a strategy to target enterprise businesses.

"We’d love to see more examples of Salesforce.com rolling out to those large customers," she said. "What we’re looking for is more than the number of users but how it’s creating greater value. The challenge with a large-scale deployment, similar to any solution, is getting adoption. Even if it’s easy to use, that doesn’t mean people are going to use it. We haven’t seen customers deploying it on a large scale."

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